Rusnak's $691m merry-go-round

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The Independent Online

John Rusnak was a church-going family man who was a competent foreign exchange dealer but never a "star" trader. He was also an unusually clever fraudster who duped his superiors and bullied colleagues, enabling him to rack up losses of $691m undiscovered for five years.

Allied Irish Banks' Allfirst Financial subsidiary hired Mr Rusnak in 1993 on the recommendation of one of his former employers. He had been trading currency options since 1986 and promoted himself as skilled in exploiting price differences between options and futures, an activity that would diversify Allfirst's revenue base.

He was considered by some colleagues as strong and confident – a hard-working, good man who attended church regularly and sat on a local school board with Allfirst's head of treasury, David Cronin. But others felt him to be arrogant, and even abusive.

Mr Rusnak's annual bonus was linked to his trading profits. Between 1997 and 2001, Mr Rusnak made a total $549,000 in bonuses on top of $530,000 in basic salary, and had a lifestyle to match.

But he did not, in fact, run the hedged book which he was hired for. Trading was mainly straightforward one-way gambles on the market moving in a particular direction. In 1997 one of those bets, on the movement of the Japanese yen, went wrong. He bought a lot of yen for future delivery, only to see the currency's value, and that of his forward positions, plummet.

To hide the losses, Mr Rusnak created fictitious options that made it look like the real options were comfortably hedged. Two bogus options trades were entered into Allfirst's system. The first would involve the receipt of a large premium, the second the payment of an identical premium. The difference was that one would expire the day it was written, the other weeks later. Mr Rusnak persuaded a back office manager that these pairs of options did not need to be confirmed, since there was no transfer of net cash. It was not Allfirst's policy to itemise expiring one-day options, so what was left on the books was one apparently valuable option which served to conceal Mr Rusnak's real losses.

Meanwhile, in his real trading, Mr Rusnak continued to lose money. He had set up "prime brokerage accounts" with Bank of America and Citibank that allowed him to deal in their names. As the losses mounted, Mr Rusnak began to sell real options to pull in more cash. But again, these were disguised by faking other contracts that made it look like they had been repurchased.

The scam continued until December 2001 when Allfirst's treasurer noticed that turnover in foreign exchange trading had risen to $25bn. He proposed closing Mr Rusnak's positions to expose any problems. But when the back office contacted the supposed counterparties to Mr Rusnak's recent transactions, they said they either did not have the options on their books, or did not trade them at all. When challenged over the difficulty obtaining confirmation, Mr Rusnak created counterfeit confirmations, which he stored in a computer file named "fake docs". But Allfirst wanted confirmation by telephone too. Mr Rusnak threatened to quit and stormed outside, but later offered to help make the calls. It was a Friday night and that would have to wait. Over the weekend he went to ground. On Monday, Dublin was called.